The protagonist of The Gruffalo is a mouse. The story of the mouse's walk through the woods unfolds in two phases; in both, the mouse uses cunning to evade danger.
The mouse goes for a walk in the forest and on his way encounters several dangerous animals (a fox, an owl, and a snake). Each of these animals, clearly intent on eating the mouse, invites him back to their home for a meal. The cunning mouse declines each offer. To dissuade further advances, he tells each animal that he is going to dine with his friend, a gruffalo, whose favourite food happens to be the relevant animal. The mouse describes the outlandish features of the gruffalo's monstrous anatomy. Frightened that the gruffalo might eat them, each animal flees. The mouse gloats to himself; he knows the gruffalo is a fictional monster:
Silly old fox/owl/snake, doesn't he know?
there's no such thing as a gruffalo!
After he has seen off the last animal, however, the mouse is shocked to encounter a real gruffalo, bearlike and hideous and with all the frightening features the mouse thought that he was inventing. True to his reputation, the gruffalo threatens to eat the mouse, but again the mouse is cunning. He tells the gruffalo that he, the mouse, is the scariest animal in the forest. Laughing, the gruffalo agrees to follow the mouse as he demonstrates how everyone is afraid of him. The two walk through the forest, encountering in turn the animals that had earlier menaced the mouse. Each is terrified by the sight of the pair and runs off, and each time the gruffalo becomes more impressed with the mouse's apparent toughness. Exploiting this, the mouse threatens to eat the gruffalo, who himself flees.
The story is based on a traditional Chinese folk tale of a fox that borrows the terror of a tiger. Donaldson was unable to think of rhymes for "tiger" so invented one for "know" instead.